Determining the amount of the disallowance of lobbying expenses.

• Author: Pecarich, Pamela J.

The Revenue Reconciliation Act of 1993 modified Sec. 162(e) to deny deductions for certain direct lobbying activities, effective for costs paid or incurred on or after Jan. 1, 1994. The IRS recently released Prop. Regs. Sec. 1.162-28 identifying the costs properly allocable to nondeductible lobbying activities. This regulation permits businesses and exempt organizations to use any reasonable method to allocate identified costs between lobbying and other activities, and does not require the maintenance of any particular records of costs of lobbying activities (other than those generally required by Sec. 6001 and the regulations).

Prop. Regs. Sec. 1.162-28(c) provides that costs allocable to lobbying activities include all of the costs that would be allocable to: lobbying under the uniform capitalization rules. These include basic labor, benefits costs, space costs (rent or depreciation), insurance and other general and administrative (G&A) costs related to lobbying activities.

Businesses or tax-exempt organizations may use the following methods in allocating costs:

1. The ratio method: Under Prop. Regs. Sec. 1.162-28(d), the amount of nondeductible lobbying costs is determined by the following formula:

   Lobbying Total costs labor hours X of operations

   Total labor (excluding third-party hours costs) To this amount, businesses would add third-party costs--the amounts paid for lobbying activities conducted by third partics. Notc that this ratio mcthod is perceived to be of little value because total costs of operations include costs that could never be allocated to lobbying activities under a traditional allocation method (such as raw material costs).

2. The gross-up method: Under Prop. Regs. Sec. 1.162-28(e), "basic labor costs" (including secretarial, maintenance and other hours) for lobbying labor hours would be multiplied by 175%. Basic labor costs are limited to wages or similar costs of labor, and do not include employee benefits. Thirdparty costs are thcn added to the result to determine total costs allocated to lobbying activities.

3. An allocation method that apl11ies the principles of the inventory capitalization rules (Sec. 263A): Under Prop. Regs. Sec. 1.162-28(f), busincsses use thc rules set forth in the Scc. 263A regulations on inventory capitalization to determine the amount of nondeductible lobbying costs.

   Under any of these methodologies, a special de minimis rule allows businesses to disregard the time spent by employees who...